The FDR Framework is the backbone for a 21st century financial system. Under this framework, governments ensure that every market participant has access to all the useful, relevant information in an appropriate, timely manner. Market participants have an incentive to analyze this data because they are responsible for all gains and losses.

Monday, November 12, 2012

Whistle-blower claims "Libor-like manipulation" of gas prices

As reported by the Guardian, it appears that gas prices, like Libor interest rates, have been manipulated. What allowed the manipulation to take place was the opacity of the over the counter market. The suggested cure is to create a database that show every transaction.

Regular readers are not surprise to see bad behavior in another opaque corner of the financial system.

What is nice to see is that someone other than your humble blogger is already calling for bringing transparency to the gas trading market by creating a trade database.

The City watchdog, the Financial Services Authority, is investigating claims by a whistleblower that Britain's £300bn wholesale gas market has been "regularly" manipulated by some of the big power companies, exploiting weaknesses that echo the recent Libor scandal.

Separately, the energy regulator Ofgem has been warned by a company responsible for setting so-called benchmark prices, ICIS Heren, that it had seen evidence of suspect trading on 28 September, a key date as it marks the end of the gas financial year and can have an important influence on future prices.

The whistleblower, who worked for ICIS Heren, raised the alarm after identifying what he believed to be attempts to distort the prices reported by the company. These benchmark prices are critically important because many wholesale gas contracts are based on them and small changes in the price can cost or save companies millions.....

The whistleblower's information, handed over to the FSA, shows that on 28 September the price at which so-called day-ahead gas contracts were being bought and sold dropped sharply at precisely the time – 4.30pm – at which ICIS Heren attempts to take the pulse of the market.

One explanation for this could be that traders were deliberately dealing below the prevailing price in order to drag the benchmark down, perhaps because they stood to gain more from other contracts linked to this benchmark.

It is not possible for price reporters to establish who did the suspicious deals as they were conducted through a third-party brokerage firm.

In a statement, ICIS confirmed that it had detected some "unusual trading" activity on the British wholesale gas market on 28 September, which it reported to energy regulator Ofgem in October.

"The cause of the trading pattern, which involved a series of deals done below the prevailing market trend, has not yet been established. ICIS welcomes the seriousness with which the regulator has so far responded to this information and we have provided all the evidence at our disposal to help determine what happened."....

Arlene McCarthy, the North West England MEP, said she feared Freedman had unearthed another case of apparent market abuse and manipulation in gas prices. "For some time I have feared there is an extensive cartel culture of market-rigging and price-fixing in the commodities markets.

"Companies guilty of abuse must face the full force of penalties and sanctions and jail for criminal behaviour," she said.

"The FSA must take action but as the UK gas is the benchmark for gas traded at EU level I will be asking European commissioners [Joaquín] Almunia and [Michel] Barnier to take urgent action on cartels and price-fixing and introduce tough rules on the setting of benchmarks and indices in the commodities markets."

Chris Cook, a former compliance officer at the International Petroleum Exchange and now a senior research fellow at University College, London, said the problems highlighted by Freedman in the gas market echoed those in the oil sector.

"There is a structural issue here that over-the-counter markets with low liquidity can be manipulated by traders putting through visible trades at a duff price. We need to make sure the market is more transparent through a transaction registry," Cook said.

About this blog

A blog on all things about Wall Street, global finance and any attempt to regulate it. In short, the future of banking and the global financial system.

This blog will be used to discuss and debate issues not just for specialists, but for anyone who cares about creating good policies in these areas.

At the heart of this blog is the FDR Framework which uses 21st century information technology to combine a philosophy of disclosure with the practice of caveat emptor (buyer beware).

Under the FDR Framework, governments are responsible for ensuring that all market participants have access to all the useful, relevant information in an appropriate, timely manner. Market participants have an incentive to use this data because under caveat emptor they are responsible for all gains and losses on their investments; in short, Trust but Verify.

This blog uses the FDR Framework to explain the cause of the financial crisis and to evaluate financial reforms like the ABS Data Warehouse.